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A $40 Billion Plan to Cash Out Of Bitcoin

(Bloomberg Opinion) -- The 1980s cyberpunk novels that predicted today’s internet failed to conceive of anything as outlandish or contradictory as Bitcoin: A digital currency that’s spent nowhere, a commodity that’s used for nothing, and a libertarian dream that’s effectively run by elites.

Now, after its 66-percent price drop from December highs, comes yet another fantastical plot twist. The Chinese company that makes most of the world’s Bitcoin-mining rigs — as well as a big pile of mining and crypto-trading profit — is thinking about a stock-market listing. The proceeds would be used to develop the kind of sophisticated hardware that would let it compete head-on with tech giants like Google in areas way beyond Bitcoin.

The firm in question is Bitmain. It is run by a 32-year-old billionaire — Jihan Wu — and has a business model that might make an antitrust regulator cancel their holiday leave. Bitmain designs and sells the powerful custom chips used to mine cryptocurrencies, but it makes money from mining too. In Gold Rush parlance, it sells the pickaxes and also works the mines. Its market share in the former is 80 percent; in the latter it’s 40 percent.

Despite this year’s crypto plunge, Bitmain has earned plenty of money from all sides of the Bitcoin trade. It is so powerful that it was seen as a driving force behind the 2017 Bitcoin spin-off, Bitcoin Cash — which aimed to displace the original and created a backlash in the process.

An IPO could value Bitmain at $40 billion, or 20 times this year’s unverified forecast earnings of $2 billion, according to the news site CoinDesk. That wouldn’t be far off the earnings multiples of established chip-makers Advanced Micro Devices Inc. and NVIDIA Corp., whose own share prices have been boosted by the popularity of their chips with the crypto crowd.

Even assuming that the mooted Bitmain multiple and 2018 earnings figure are right, the bigger question would be how much profit it might expect to make in a future crypto market that’s far more stringently regulated. Potential investors would want to be reassured that the cratering Bitcoin price isn’t a harbinger of worse.

Yet a falling market can enrich those who have it cornered. As my colleague Shuli Ren noted in June, Bitmain has slashed prices for its chips to shake out weaker rivals. Its profit margin is said to be about 50 percent, according to Fortune.

Indeed, it would be a mistake to see this as a uniquely Bitcoin play. The most interesting part of a Bitmain pitch might be its shift into non-crypto terrain. The company has been using its chip-design expertise to expand into artificial intelligence, and company documents estimate this will make up 40 percent of its revenue in the next five years, according to CoinDesk. Wu told Fortune magazine in June that this business would be similar to Google’s AI-focused tensor processing units.

Quite what the nationalists in the Donald Trump administration might think of a Chinese-owned crypto-powerhouse raising money to spend on advanced AI hardware and compete with Silicon Valley is anyone’s guess. Even if Bitmain is creating tech jobs in the U.S., and backed by U.S. venture capital funds, it would probably be listed in Hong Kong.

All of this is obviously very much still in the rumor and speculation category, including the listing itself. But what appears like a straightforward play on digital currencies, might in fact end up as an attempt by a leading Chinese entrepreneur to cash out of the Bitcoin craze and fund some leading-edge tech instead — ironic when you consider that China has been far stricter on crypto-trading than most western nations.

For investors still nursing losses from Bitcoin’s wild ride, the prospect of another tech moon-shot may seem a bit too soon. But maybe this could end up the first useful real-world thing to emerge from the Bitcoin bubble.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.